Sentiment in Hong Kong’s residential property market remains sluggish following a series of real estate tightening measures imposed by the government, according to the latest monthly report from Knight Frank.

Data from the Land Registry show that residential transaction volume slumped 28.1% month on month, with only 4,534 sales recorded in March.

The reports says that investors and non-local buyers, mostly from mainland China, have been virtually screened out from the residential market due to heavier taxation and higher investment costs.

‘The market is now dominated by end users. Amid uncertainty in the property market, some home owners, especially those in the mass market, started to soften and became more flexible during price negotiations,’ it says.

Price growth in the luxury and mass residential sectors was a mere 0.6% and 1.2%, respectively, in the past month.

The report also points out that following the Hong Kong Monetary Authority’s tightening of the risk weighted assets requirement of newly offered mortgages, several leading banks raised home loan rates and lowered the valuation of residential units, on the back of gloomy market sentiment.

‘Potential buyers, facing more difficulty in financing and waiting for the release of new residential projects in the coming few years, shifted their focus towards the rental market.

Meanwhile, some landlords also shifted their units to the leasing market and the increased supply dragged down luxury residential rents by 0.4% in March,’ it explains.

In the primary market, developers continued to launch new projects during the Easter holiday. Some adopted a price cutting strategy, offering various beneficiary packages to boost sales.

‘We believe that if Hong Kong’s current inflationary environment with low interest rates is sustained, luxury residential prices will remain stable and fall no more than 5% in 2013, while mass residential prices will drop no more than 10%,’ Knight Frank says.

However, the firm adds that domestic transaction volume could drop 10% in 2013.

‘On the leasing front, potential buyers may shift to renting, while landlords may also shift their units onto the leasing market. We therefore expect luxury residential rents to remain firm in 2013, while mass residential rents could rise by up to 10%,’ the report adds.